June 5 (Bloomberg) -- The Obama administration’s rule
barring for-profit colleges from paying recruiters bonuses tied
to the number of students they sign up was upheld by a federal
appeals court.

The U.S. Court of Appeals in Washington ruled today that
U.S. Education Department regulations on the practice, put into
effect in 2011, were properly enacted and are consistent with
the aims of the Higher Education Act of 1965. At the same time,
the court ordered the trial judge to get further explanation
from the department of the effect of the rule change on minority
recruitment.

The court also questioned whether the department had
justified eliminating bonuses for recruiters that are based on
students’ successful completion of programs.

The Obama administration proposed the rules as part of a
crackdown on for-profit colleges’ recruitment and marketing
practices. The U.S. Department of Education, Congress, federal
prosecutors and state attorneys general are scrutinizing the
institutions, which rely on federal financial aid for as much as
90 percent of their revenue and have higher student-loan default
rates than traditional colleges. The industry says it caters to
lower-income and minority students overlooked by the higher-education establishment.

Unpaid Loans

The Education Department said tying bonuses to enrollment
led for-profit colleges to sign up students who didn’t benefit
from their degrees, leaving them with government loans they
couldn’t repay.

“We are pleased that the court has largely upheld our
regulations to protect students and taxpayers,” Justin
Hamilton, an Education Department spokesman, said in an e-mail.
Where judges took issue with the rules, the department is
“evaluating the appropriate next steps,” he said.

The court sided with the for-profit colleges’ challenge to
a regulation requiring that every state where online courses are
offered provide separate authorization.

The three-judge panel also said the Education Department’s
ban on “misrepresentation” in marketing to students was too
broad, in part because it forbids statements that are “merely
confusing.”

The court’s ruling gives “significant relief” to for-profit colleges, said Steve Gunderson, president of the
Association of Private Sector Colleges and Universities, the
Washington-based group that brought the lawsuit.

‘Reasonable’ Changes

The trade organization “looks forward to working with the
department, to help prepare reasonable regulatory changes that
best serve students and lead to positive educational outcomes,”
Gunderson said in a statement.

The ruling “is a minor positive for the industry,” said
Jarrel Price, an analyst at Washington-based Height Analytics.
“It could help rebuild motivation and reinvigorate enrollments
across the sector.”

Price said the decision will lower legal risk for
educational institutions related to confusing advertising
policies. Price doesn’t publish ratings on the sector or on
individual companies.

Phoenix-based Apollo Group Inc., owner of the University of
Phoenix, the biggest for-profit chain by enrollment, rose 0.8
percent to $32.69 in trading in New York at 4:30 p.m.
Pittsburgh-based Education Management Corp., the second-biggest,
rose 1 cent to $7.17. Washington Post Co., which owns Kaplan
Higher Education, fell 39 cents to $351.24.